In recent weeks, the international oil prices have been on a downward spiral, largely driven by significant shifts in the supply-demand equilibrium in the global marketThe supply of crude oil has been on the rise, while demand has shown signs of contraction due to dimming economic growth prospects worldwideTwo key developments within the supply side hold considerable potential to alter the global oil supply landscapeFirstly, the Organization of the Petroleum Exporting Countries (OPEC) and its allies, collectively known as OPEC+, are redrawing their longstanding strategy of production cuts aimed at price stabilization, and are now planning to ramp up oil outputSecondly, South America has emerged as a new growth point for global oil production, significantly increasing its crude oil supply.

As of last week, the price for West Texas Intermediate (WTI) crude in New York experienced its worst weekly performance since October 2023, plummeting 8% during that period

This week, oil prices continued to fluctuate within low ranges, with significant drops on September 10, where WTI futures and London Brent crude futures nosedived by 4.31% and 3.69%, respectivelyNonetheless, a rebound took place over the subsequent days, leading to closing prices of $68.97 per barrel for WTI and $71.96 for Brent on September 12. These recent declines have pushed oil prices perilously close to a three-year low, fostering a climate of hesitance and caution among investorsThe imminent question remains: will oil prices stabilize around the $70 per barrel mark before rebounding, or are we bound for further declines?

The turmoil in the international oil market has catalyzed a swift exodus of speculative capitalData from exchanges on September 3 revealed that hedge funds and other speculative investors accelerated their selling, especially in the most heavily traded oil futures contracts

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Many fund managers drastically reduced their net long positions—the difference between bullish and bearish bets—to the lowest levels since 2011, when such data began being compiledSpecifically, WTI's net long positions decreased by 62,000 contracts to 125,000, while Brent's dipped almost by half to around 42,000 contractsSince early July, bullish bets have been slashed by more than half, indicating a burgeoning bearish sentiment in the market that has triggered a domino effect of selling.

The primary drivers behind the decreasing international oil prices hinge upon the aforementioned supply-demand dynamicsThe ongoing increase in crude oil supply directly counters the lackluster demand stemming from the world’s economic malaiseThere are two main reasons for the bearish outlook: firstly, disappointing economic data from leading global economies, with clear indications of a slowdown in the United States and a downward trend in crude demand from the broader East Asian region; secondly, the collective OPEC+ set to sustain its production increases into the early next year, raising concerns over potential oversupply, which continues to suppress oil prices

Even the recent delay in previously planned production increases by OPEC+ members—the postponement set for at least two months—has done little to assuage market pessimism, with oil prices continuing their downward trajectory post-announcement.

Currently, the uncertainty surrounding international oil prices is primarily influenced by the performance of the U.Seconomy and the Federal Reserve's interest rate decisions.

A recent report from the U.SBureau of Labor Statistics indicated that in August, the U.Seconomy added 142,000 non-farm jobs, falling short of the anticipated 165,000. Meanwhile, July's figures were revised dramatically down to 89,000 from an initial 114,000. This underscores the ongoing struggles in the labor marketThe unemployment rate saw a slight decline from 4.3% in July to 4.2% in August, marking its first drop since March this yearA sector-specific glance shows that the growth in employment was primarily concentrated in construction and healthcare, with respective increases of 34,000 and 31,000 jobs

In stark contrast, the manufacturing sector experienced a significant downturn, shedding 24,000 jobs—far exceeding estimates that suggested a modest drop of 2,000. Other key sectors remained relatively stable, with mining, wholesale retail, transport and warehousing, information, financial activities, leisure, and hospitality showing little variation from expectations.

The mixed results, though slightly encouraging, have reignited fears of a recession in the United StatesHowever, they also pave the way for the Federal Reserve to consider rate reductionsThe Fed noted significant progress in achieving its dual mandate of price stability and maximal employment, with inflation gradually aligning toward the targeted 2%. Consequently, it deemed the reduction of the federal funds rate appropriate at this juncture.

Market speculation leans toward the likelihood of a 50 basis point rate cut in September by the Federal Reserve

Following the employment data release, the yield on two-year Treasury bonds dipped, with S&P 500 futures lingering at low points and the dollar continuing its downward movementConcurrently, concerns about the oil market prospects linger, as apprehensive investors fret about a potential slowdown in the U.Seconomy contributing to weakened oil demand amid an already tepid high summer demand seasonThe 1H of this year reflected a decrease in oil imports from Asia, further constraining upside potential for oil prices.

On the supply front, two significant shifts warrant close scrutinyFirstly, OPEC and OPEC+ are actively reevaluating their traditional strategy of production limits to stabilize prices, now strategizing on increasing oil output to meet the fiscal needs of their member nationsHistorically, OPEC+ has maintained that its production cuts are temporary, contingent on market equilibrium

This shift has put some member countries in a position where they must sacrifice shares in the global oil market to comply with production limits, while others, like Iraq, have profited despite not adhering strictly to allocated production quotas; Iraq's output in August exceeded commitments by 320,000 barrels per day leading to internal discord within OPEC+. Meanwhile, non-OPEC+ member nations are unbound by these constraints, seizing the opportunity to capture market share otherwise relinquished by OPEC+ producers.

At present, oil prices appear too low for the majority of OPEC+ members, who reportedly require around $80 to $90 per barrel to maintain budget equilibriumOPEC remains optimistic about oil demand growth for 2024, forecasting an increase of over 2 million barrels per day this yearHowever, the reality dictates that OPEC will need to reassess its policies in response to evolving market conditions.

Recent developments indicate that OPEC+ has resolved to cautiously taper voluntary production cuts beginning next year, projecting an increase in market supply by 180,000 barrels per day

Should major oil-producing countries within OPEC choose to maximize their production capacities, the global oil market could undergo a significant restructuring until equilibrium is reestablished.

Secondly, the surge in crude oil production from South America has made it a new focal point of growth in the world oil supply chain.

Statistics reveal that Brazil’s oil output in July is projected to increase by 107,000 barrels per day, bringing total production to 3.52 million barrels per day; the average export volume is expected to climb to 3.76 million barrels daily this yearLooking ahead to next year, Brazil's production could rise by an additional 400,000 barrels per day, with average output anticipated to exceed 3.9 million barrels by 2025.

Traditionally prolific oil producer Venezuela recorded an August output of 930,000 barrels per day, maintaining a steady monthly growth trend

Following the easing of U.Ssanctions in Q4 of 2023, the country's oil production has been on an upward trajectory, with expectations for continued growth in the near term.

Argentina’s oil production statistics are also remarkableIn Q2 of this year, the nation achieved an annual output growth rate exceeding 7%, with an average yield of 691,000 barrels per dayProjections indicate that both this year and the next will mark a period of robust growth for Argentina's oil production, with expected growth rates around 8% and 13%, respectively, poised to surpass 800,000 barrels per day by the latter half of next year.

In summary, the balance of the global oil market is oversupplied and unlikely to see significant change in the short termAccording to research models from Citibank, amidst sluggish economic growth and declining demand, international oil prices could fall to $60 per barrel by next year

Citibank additionally noted that current geopolitical tensions have not exerted a significant direct impact on oil prices, as regional conflicts, while temporarily elevating prices, have resulted in progressively weaker rebounds, merely providing selling opportunities.

In recent years, the $70 per barrel mark has emerged as a crucial support level within the oil market and is considered a psychological threshold for OPEC’s production cut strategyNow, with international oil prices trending bearish in the long haul, the market has already breached this significant psychological barrier, raising questions about the future trajectoryIn the oil market, there’s a prevailing belief that low prices serve as the antidote to low pricesOPEC may adapt its strategy, permitting short-term price reductions in favor of longer-term stability as it seeks to gain groundUltimately, the market will deliver the answers.